Demography & International Capital Flows

Transcription

1 Demography & International Capital Flows David Backus, Thomas Cooley, and Espen Henriksen NYU Conference on Chinese Capital Markets May 31, 2011 This version: May 31, 2011 Backus, Cooley, and Henriksen (NYU) International Capital Flows 1 / 20

2 Capital flows: current accounts Largest deficits Amount (b$) Largest surpluses Amount (b$) United States 470 China 306 Italy 72 Japan 195 Spain 63 Germany 176 United Kingdom 56 Mideast oil 150 France 53 Switzerland 75 India 49 Russia 71 Turkey 49 Netherlands 56 Canada 49 Norway 53 Brazil 47 Taiwan 41 Greece 32 Sweden 30 Australia 32 Korea 28 Portugal 23 Malaysia 28 Total deficits 1183 Total surpluses 1466 Source: IMF, WEO, April 2011 version, data for 2010 Backus, Cooley, and Henriksen (NYU) International Capital Flows 1 / 20

3 Capital inflows: sign of success? Larry Summers, IMF, October 3, 2004: There is a standard set of things that finance ministers of countries with significant current account deficits say. Perhaps the sharpest formulation is: We live in a country that capital is trying to get into. Would you rather live in a country that capital is trying to get out of? Backus, Cooley, and Henriksen (NYU) International Capital Flows 2 / 20

4 Capital inflows: portent of peril? Daniel Gross, New York Times, May 8, 2005 [US] imbalances are eerily reminiscent of recent economic crises. Could we see a perfect storm [for the US economy]? If so, what would it look like? Nouriel Roubini estimates that long-term interest rates in the US could rise sharply and the dollar fall. Jeffrey Frankel adds: some of us have been warning of this hard-landing scenario for more than 20 years. Øystein Olsen, Norges Bank, March 2011 Global trade imbalances have been reduced somewhat over the past two years, but there is a considerable risk that they will persist. They must be corrected. Backus, Cooley, and Henriksen (NYU) International Capital Flows 3 / 20

5 Evidence Evidence: current accounts CA/GDP AUS CAN CHN DEU FRA ITA JPN NOR USA Source: World Bank, World Development Indicators Backus, Cooley, and Henriksen (NYU) International Capital Flows 4 / 20

6 Evidence Evidence: current accounts CA/GDP USA AUS CAN CHN DEU FRA ITA JPN NOR USA Source: World Bank, World Development Indicators Backus, Cooley, and Henriksen (NYU) International Capital Flows 4 / 20

7 Evidence Evidence: current accounts CA/GDP CHN AUS CAN CHN DEU FRA ITA JPN NOR USA Source: World Bank, World Development Indicators Backus, Cooley, and Henriksen (NYU) International Capital Flows 4 / 20

8 Evidence Evidence: current accounts CA/GDP JPN AUS CAN CHN DEU FRA ITA JPN NOR USA Source: World Bank, World Development Indicators Backus, Cooley, and Henriksen (NYU) International Capital Flows 4 / 20

9 Evidence Evidence: net foreign assets NFA/GDP AUS CAN CHN DEU FRA ITA JPN NOR USA Source: Lane and Milesi Ferretti Backus, Cooley, and Henriksen (NYU) International Capital Flows 5 / 20

10 Evidence Evidence: net foreign assets NFA/GDP USA AUS CAN CHN DEU FRA ITA JPN NOR USA Source: Lane and Milesi Ferretti Backus, Cooley, and Henriksen (NYU) International Capital Flows 5 / 20

11 Evidence Evidence: net foreign assets NFA/GDP CHN AUS CAN CHN DEU FRA ITA JPN NOR USA Source: Lane and Milesi Ferretti Backus, Cooley, and Henriksen (NYU) International Capital Flows 5 / 20

12 Evidence Evidence: net foreign assets NFA/GDP JPN AUS CAN CHN DEU FRA ITA JPN NOR USA Source: Lane and Milesi Ferretti Backus, Cooley, and Henriksen (NYU) International Capital Flows 5 / 20

13 Evidence Evidence: demography World Source: United Nations, Population Estimates and Projections Backus, Cooley, and Henriksen (NYU) International Capital Flows 6 / 20

14 Evidence Evidence: demography United States Source: United Nations, Population Estimates and Projections Backus, Cooley, and Henriksen (NYU) International Capital Flows 6 / 20

15 Evidence Evidence: demography China Source: United Nations, Population Estimates and Projections Backus, Cooley, and Henriksen (NYU) International Capital Flows 6 / 20

16 Evidence Evidence: demography Japan Source: United Nations, Population Estimates and Projections Backus, Cooley, and Henriksen (NYU) International Capital Flows 6 / 20

17 Evidence Evidence: summary Capital flows are persistent Ditto net foreign assets Demography inherently persistent Sharp differences across countries Worth exploring a connection? [Apparently yes: Attanasio-Kitao-Violante, Bloom-Canning, Boersch-Supan-Winter, Brooks, Domeij-Floden, Feroli, Ferrero, Henriksen, Krueger-Ludwig, and others had the same idea] Backus, Cooley, and Henriksen (NYU) International Capital Flows 7 / 20

18 Model Model: how it works NFA is difference between net worth and capital stock Think of each as a function of age Aggregates are sums across age groups Net worth follows from life-cycle saving Net worth varies by age Aggregate net worth depends on age distribution Capital allocated to equate marginal products Connected to age distribution via effective labor input Equates K/Y across countries Backus, Cooley, and Henriksen (NYU) International Capital Flows 8 / 20

19 Model Model: questions Individual saving rates differ across countries Not clear why Should we add wedges to mimic? Capital-output ratios differ across countries Ditto Market value capital stock Ditto Backus, Cooley, and Henriksen (NYU) International Capital Flows 9 / 20

20 Model Model: mechanics One-good deterministic world Countries: G8 (for now) Each has OG structure Power utility, fixed labor supply [+ age-specific adjustments] Identical production functions, country-specific productivity Fixed retirement age: 65 No bequests: perfect insurance for mortality risk No frictions either within or across countries Backus, Cooley, and Henriksen (NYU) International Capital Flows 10 / 20

21 Model Model: parameter values Time interval one year Capital share (α) 1/3 Risk aversion (σ) 4 Discount factor (β) 1/1.025 Depreciation rate (δ) 2.5% Fertility and mortality UN data Cohort sizes UN data Backus, Cooley, and Henriksen (NYU) International Capital Flows 11 / 20

22 Model Model: net foreign assets NFA (% of GDP) CA DE FR IT JP US GB Backus, Cooley, and Henriksen (NYU) International Capital Flows 12 / 20

23 Final thoughts Summary and open questions Model generates Persistent movements in capital flows and NFA Clear connection between NFA and demography in G8 China (work in progress) Striking demographics generate high saving rate But not as high as we see in the data Internal financial market frictions an issue for inflows? Capital controls an issue for outflows? Backus, Cooley, and Henriksen (NYU) International Capital Flows 13 / 20

24 Extra slides China: international investment positions Category Assets (tr$) Liabilities (tr$) Direct investment Portfolio investment Other Official reserves Total Net foreign assets Source: IMF, IFS, May 2011 version, data for 2009 Backus, Cooley, and Henriksen (NYU) International Capital Flows 14 / 20

25 Extra slides China: GDP GDP (2009, trillions of USD) USA JPN MEX CHN IND Source: Penn World Table, Version 7.0 Backus, Cooley, and Henriksen (NYU) International Capital Flows 15 / 20

26 Extra slides China: GDP per person GDP per person (2009, thous USD) USA JPN MEX CHN IND Source: Penn World Table, Version 7.0 Backus, Cooley, and Henriksen (NYU) International Capital Flows 16 / 20

27 Extra slides China: growth Growth ( , annual %) USA JPN MEX CHN IND Source: Penn World Table, Version 7.0 Backus, Cooley, and Henriksen (NYU) International Capital Flows 17 / 20

28 Extra slides US: household net worth net worth real estate at market real estate at cost equity Ratio to GDP Year Backus, Cooley, and Henriksen (NYU) International Capital Flows 18 / 20

29 Extra slides US: personal consumption Ratio to GDP Year Backus, Cooley, and Henriksen (NYU) International Capital Flows 19 / 20

30 Extra slides Notes for Denoon NYU 1. Thank you, I m delighted to be here. 2. This is joint work with Espen and Tom. It s work in progress, and not focused on China, although China plays an important role here as it does elsewhere. 3. The issue is international capital flows. We argue that in the developed world, low-frequency movements are linked to demography. 4. China remains something of a mystery, but I can be more specific about that later. 5. Capital flows have become a contentious issue, in both policy and academic circles. -> quotes 6. We d prefer to change the language and look at the evidence. Plan of attack: evidence, model, discussion. Backus, Cooley, and Henriksen (NYU) International Capital Flows 20 / 20